G20-Bank of Canada: high bar to change inflation targeting

Randall Palmer

3 Min Read

ISTANBUL, Feb 10 (Reuters) - Compelling arguments will be required to cause the Bank of Canada to target something other than inflation, Governor Stephen Poloz said on Tuesday, also citing reasons not to lower the 2 percent target level.

The government and the Bank of Canada will have to decide by the end of next year whether to renew the five-year agreement requiring the central bank to pursue 2 percent inflation.

Poloz told Reuters and another news outlet that inflation targeting had been an obvious success in the past quarter century.

“It’s proven itself, when you consider the previous 25 years, how hard it was to do policy and...the superior outcomes that we’ve had,” Poloz said during a break in meetings of the Group of 20 leading economies.

“So that means it’s a pretty high bar to change that and replace it with something else.”

As for a possible cut to the level of the target, he said central bank thinking on that had been influenced by the limited room for maneuver even at the 2 percent level, let alone if it were lower.

“What makes it more relevant this time is the experience that we have had,” he said.

He referred to the fact that the Bank of Canada and other central banks hit the “zero lower bound” in the recent financial crisis, where they were effectively unable to cut interest rates further in order to provide needed stimulus.

Demographic and other factors have already lowered what is considered to be the neutral rate of interest to around 3-1/4 to 3-1/2 percent, leaving even less room for maneuver.

“So what we have to think about is what risk does that pose to us in our ability to keep inflation on track and avoid deflationary outcomes,” he said.

The bank will be researching the issue during 2015.

When central banks are unable to cut further, they have sometimes resorted to forward guidance, as the Bank of Canada did when it promised to keep rates low for a long stretch barring major changes.

Last year, Poloz said he would no longer give forward guidance in normal circumstances, and on Tuesday he reiterated that such guidance creates more volatility by enabling traders to make one-way bets.

“As I said, we’ll come back to forward guidance when we think we need it or if there is some distress in the market,” he said.